Risk Management

Bankrupt Sponsor Leaves Pro Team in the Lurch

Will England's West Ham United have to deflect the heat directed at its main sponsor, XL Leisure?
Marie LeoneSeptember 12, 2008

Michael Phelps may be a hot sponsorship commodity after collecting his record-breaking haul of eight gold medals at the Beijing Olympics. But companies still face risk when sponsorships go sour — an occurrence that likely will increase as the economy slows.

The latest company to feel the sting of a sponsorship gone bad is English professional soccer club West Ham United, a member of the elite Premier League. The club is in the first year of a three-year deal with XL Leisure Group that calls for the travel-services company to pay West Ham $4.48 million annually for the right to emblazon team game-day jerseys and a stadium billboard with the XL Holidays logo, the Associated Press reported. XL Holidays is the company’s tour group.

But the sponsorship arrangement is in danger given Friday’s announcement that XL Leisure has been forced into administration, the English equivalent of bankruptcy, and shut down. The company generated $1.1 billion in revenues in 2007 but recorded a loss of $16 million in net income. It cited high fuel prices and a generally weak economy for its financial collapse.

West Ham United said XL Holidays remains the club’s principal partner and that therefore it would wait for an update from the administrator before evaluating how the bankruptcy affects the sponsorship deal. “We are of course saddened for the customers of XL Holidays that have been affected and hope that a speedy and satisfactory solution is found,” the soccer club said in a statement.

Indeed, customers’ travel plans were devastated by canceled flights and grounded aircraft, according to a report from Datamonitor. The report noted that the U.K.’s Civil Aviation Authority estimated that the XL Leisure shutdown stranded about 85,000 people and probably affected 200,000 more who made advance bookings.

XL Leisure apparently will not make its remaining 2008 payment to West Ham, but that is not expected to pull the plug on the team’s ability to operate. The next big decision facing management is whether to allow the XL Holiday logo to adorn team jerseys on Saturday now that the company has generated so much ill will among travelers.

West Ham United isn’t the first pro team to be embarrassed by a sponsor’s financial mismanagement. In 2002, when the Enron scandal was still fresh in the mind of sports fans, Major League Baseball’s Houston Astros had to wrestle with exorcising the “Enron” name from its stadium. In 1999, two years before the company collapsed in disgrace, the team signed a 30-year, $100 million stadium naming-rights deal with the energy company. The Astros paid $2 million to back out of the deal.